Crisil Core Inflation Tracker: WPI inflation in March eases a notch

After a two-month run-up, inflation based on the Wholesale Price Index (WPI)-based inflation cooled to 5.7 per cent in March from 6.6 per cent in February. Fuel and power was one of the largest contributors to the fall, with inflation for the category coming in 290 basis points (bps; 100 bps make a percentage point) lower at 18.2 per cent, followed by core (non-food, non-fuel) inflation, which fell 60 bps to 3.1 per cent. 

The decline in food inflation was minimal — down 44 bps to 4.4 per cent.  Both core inflation and CRISIL Core Inflation Indicator (CCII) — which strips the impact of basic metal prices from the core — continued to move in sync. While core inflation fell to 3.1 per cent in March, from 3.7 per cent in February, the CCII fell to 2.6 per cent from 3.1 per cent. 

However, there is a big difference in average inflation as measured by these two measures in fiscal 2017 as a whole. While core inflation averaged 1.5 per cent, the CCII average stood at 2.9 per cent. 

CCII has, over time, offered a better perspective of demand-side impact on inflation by negating “basic metals, alloys and metal products” inflation, which is subject to high price volatility, and by adding back “food products” where inflation is believed to be led by excess demand. Inflation in the “basic metals, alloys and metal products” fell in March (to 4.6 per cent from 6.4 per cent in February), pulling down non-food manufacturing inflation. 

Interestingly, manufacturing inflation declined to 3 per cent in March, from 3.7 per cent in February, led by lower inflation in all categories barring paper & paper products, rubber & plastics, chemical products and transport equipment. The fall in manufacturing inflation for the second consecutive month reflects a lack of pricing power. 

The fall in WPI inflation in March was led by a bigger slowdown in fuel inflation, compared with food inflation. Within the fuel category, even as coal and electricity prices remained stable over the month, the mineral oils category saw inflation decline a  500 bps on-month. The sharpest decline was in aviation turbine fuel (down 1,912 bps), followed by naphtha (1,762 bps), furnace oil (1,150 bps), light diesel oil (1,145 bps) and high speed diesel (690 bps). An appreciating rupee in March possibly aided part of the fall in the imported inflation of these fuels. 

On its part, food inflation slowed to 4.4 per cent from 4.8 per cent in February. Even as prices of fruit & vegetables continued to edge higher (partly due to a weak base), falling inflation in cereals, pulses, milk, eggs, meat & fish and condiment & spices led to a slowdown in overall food inflation. 

Going forward, food inflation could see some upside as global prices of agriculture commodities also step up this year and risk of El Niño looms.

Overall, we expect some upside pressure on inflation as its imported component nudges up on account of firming global commodity prices. Also, as the economy gets remonetised, some pent-up demand will have returned. The stickiness in core inflation in recent months remains a worry since wage-price negotiations based on a sticky core can potentially lift overall inflation.